Ohio derailment costs continue to hit Norfolk Southern’s bottom line
Atlanta-based Norfolk Southern reported a precipitous decline in first quarter profit, tallying hundreds of million of dollars of expenses in the fallout of its fiery derailment of a train carrying hazardous materials in East Palestine, Ohio, more than a year ago.
The company recorded $592 million in expenses in the first quarter related to the East Palestine derailment.
That’s after Norfolk Southern had already tallied $1.1 billion in charges for its response by January.
Earlier this month, Norfolk Southern announced a $600 million settlement agreement to resolve a consolidated class action lawsuit filed against the railroad after the East Palestine derailment. The $592 million expense includes the benefit of $108 million in insurance recoveries as well as other cleanup costs.
Norfolk Southern said the settlement of the class action lawsuit “does not include or constitute any admission of liability, wrongdoing or fault.”
Norfolk Southern Chief Financial Officer Mark George said during an investor conference call Wednesday that the settlement “addresses the most significant remaining legal exposures for our shareholders.”
On Wednesday, the company reported $53 million in quarterly net income, down from $466 million in the first quarter of 2023.
The company saw its railway operating revenues decline to $3 billion in the first quarter, down 4% from a year earlier. Its railway operating expenses increased about 17% compared to a year ago to nearly $2.8 billion.
The railroad said it is seeing pressure on its coal business and exports due to the Baltimore bridge collapse and port closure, resulting in a $25 million to $35 million revenue impact per month.
In late January, the company said it would cut 300 people from its management staff over the following several months to reduce costs.
On Wednesday, Norfolk Southern said its first quarter cuts will result in a reduction of about 350 nonunion employees from its workforce by May through voluntary and involuntary separations. That resulted in $64 million in charges, mainly for separation payments.
The railroad is facing a takeover attempt by an activist investor group based in Ohio that has argued for the replacement of Norfolk Southern CEO Alan Shaw and replacement of board members.
Norfolk Southern has mounted a vigorous defense and rolled out some of its own reforms, including the replacement of its chief operating officer with John Orr, who was Canadian Pacific Kansas City’s (CPKC) chief transformation officer.
The appointment of Orr as COO cost Norfolk Southern $35 million, the company disclosed Wednesday. That includes $25 million Norfolk Southern previously said it had agreed to pay CPKC for a waiver of Orr’s noncompete provisions and other “financial and commercial considerations.”
Orr told investors that after stepping into the position last month, he went on a “system safety blitz to provide clarity around the value of safety.”
He also said “it is imperative that we close the profitability gap with our peers,” and is working to reduce the number of locomotives in the railroad’s available fleet and making other productivity improvements. Norfolk Southern is also on a path to reduce its total head count by 2% by the end of the year. Norfolk Southern said it had 20,700 employees at the end of 2023, of which 2% would be about 414.
Orr also said his “first official act” on the ground was to visit East Palestine, to understand “the scope and scale of the commitment that NS has made to that community, I’ve never experienced anything like that. And so I came in with a bias and really had to understand the magnitude of that … and how that could have had a more lasting impact across not only on NS but the sector.”
Both Norfolk Southern and the activist investment firm, Ancora Holdings Group, have flooded shareholders with messages promoting their respective positions and strategies as the May 9 shareholder annual meeting for a vote on the matter approaches.
Norfolk Southern disclosed Wednesday that it recorded $21 million in “costs associated with shareholder advisory matters” in the first quarter.
The man Ancora wants to install as chief operating officer of Norfolk Southern, former CSX executive vice president of operations Jamie Boychuk, said during a town hall for shareholders: “Norfolk Southern has good bones, structure. It just needs to be stripped down to the studs and we need to rebuild this thing.” Ancora’s proposal for Norfolk Southern has raised concern among some rail unions.
Shaw, the Norfolk Southern CEO, said on Wednesday during the company’s investor conference call that the railroad’s “strategy is designed to mirror the great success stories of the Canadian railroads who have recognized that (precision scheduled railroading) is about more than tearing a railroad down to its studs and slashing costs regardless of the fallout.”
“We’re not tearing this thing down to the studs,” Shaw said. “We’re focused on safety and we’re focused on a sustainable plan for Norfolk Southern that drives long term shareholder value.”
